Entrust vs. VeriSign 8-17-98

CBS.MarketWatch.com

SANTA MONICA, Calif. (CBS.MW) -- Both newly public Entrust Technologies and rival VeriSign call themselves "the leading provider" of digital identification certificates, but at least one analyst says it's way too early to tell which company will dominate the market.

Certificates are basically electronic signatures that verify the identity of a user in a given transaction. They are widely viewed as the key to the growth of commerce on the Internet.

"The growth we're likely to see in the next five years ... is going to dwarf today's market," said Forrester Research analyst Ted Julian. "We're at such an early stage of the digital certificate market that you really can't say either company has a defensible leadership position right now."

Of course, that isn't stopping both Richardson, Texas-based Entrust Technologies , which rose 25 percent on its U.S. stock market debut Tuesday, and Mountain View, Calif.-based VeriSign (VRSN)
VRSN, -0.05%
from trying to make the claim for No. 1.

Entrust said in its prospectus that it has sold more than 3 million digital certificates. VeriSign President and CEO Stratton Sclavos said in an interview with CBS.MarketWatch.com that his company has also sold "about 3 million" certificates.

Entrust, with 47.6 million shares outstanding after the offering, is valued at about $1.1 billion, while VeriSign, up 15 percent on Tuesday, has a market cap of about $653 million.

It's tough to make valuation comparisons between the two companies, since they're using dramatically different pitches to sell their products, Julian said. Entrust helps customers internally build and manage their own systems for issuing digital certificates, while VeriSign handles most of that work for clients at the company's data centers.

Sclavos said VeriSign's approach is appropriate for companies that don't consider digital certificates part of their business expertise and called it analogous to the way many companies hire outside contractors like ADP to handle their payroll processing.

Forrester's Julian, however, said Entrust's do-it-yourself tactic also has its appeal. "The gut reaction -- if you are concerned about security -- is to want to own it in-house," Julian said.

Entrust argues its technology offer a more comprehensive solution than VeriSign's. "The mere issuance of digital certificates does not ensure that a user's access is properly monitored, that privileges associated with access are accurately and currently defined, or that the certificates in question have not been withdrawn or replaced," the company says in its prospectus.

Entrust's approach also benefits its own bottom line. Entrust has been profitable nearly every quarter since its inception, while VeriSign continues to lose money as it spends money building out its infrastructure of data centers, in which the company has invested $30 million to $40 million, Sclavos said.

VeriSign lost $4.9 million in the second quarter ended June 30 on $5.3 million in revenue, while Entrust lost $21.5 million on $11 million in sales. Nearly all of Entrust's loss, however, came from $20.2 million in charges related to the purchase of a Switzerland encryption and security company designed to give the company a bigger presence in Europe.

Julian said both companies will have trouble growing in the short-term as companies worry about the looming Year 2000 bug, in which many computers are expected to shut down because they're not able to read the date. "Y2K is soaking up a lot of ... the time and money" of companies' information technology departments, he said.

Sclavos argues that his company is actually benefiting from the Y2K dilemma since companies focused on fixing their Y2K problems are more willing to let VeriSign handle the management of their digital certificates.

VeriSign's enterprise business has grown from six clients in November to more than 120, Sclavos said. VeriSign still has about a 90 percent market share in the public Internet space, in which companies like Amazon.com and E-Trade use digital certificates to handle e-commerce transactions. Entrust does not compete in this space, and other competitors like GTE and IBM have had a negligible impact, Sclavos said.

Sclavos agrees with Julian that the potential for both Entrust and VeriSign is enormous. "If we're at more than 5 percent penetration in even the total available market as it is today, I'd be shocked," said Sclavos, pointing out that only 65,000 of the 2 million commercial web sites use VeriSign's technology.

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